How risky Bitcoin really is? Know your investment & learn from the dot.com bubble

Bitcoin is getting more and more attention every day – even from general public (read – non-nerds, technology enthusiasts and programmers). Reasons being:

  • Massive growth in the last year (especially months) – from $700 t $7000 that’s +1000% in 12 months
  • Widening coverage – firms like JP Morgan or Morgan Stanley or generally Wall Street are looking into it and writing about it. There’s many articles in standard investor portals like Seeking Alpha and many more – not just nerdy forums about cryptocurrencies
  • ICO’s – new companies promising (many not delivering, but that’s for another post) cool services running on blockchain and pushing the boundaries of today’s technology – in 2016 “only” $96 million was raised, in 2017 already $3,460 million was raised and counting. Where’s big money, there’s interest.
  • Even major players like IBM are developing their own blockchain technology – and my guess would be that Amazon, Apple, Adobe or VISA might be working on such as well.

There’s more of course, but these in my opinion account for the majority of BTC’s growth in interest.

But before you run to join the frenzy, you should be aware of the key risks.

How risky Bitcoin is then?

Risk #1 – is it a bubble?

Bitcoin growth in 2017 has all the signs of a dot.com bubble. It’s going to burst one day. That means – BTC value can drop significantly. As we have established before, a bubble isn’t necessarily a bad thing if you are here for the long run.

It’s definitely a bad thing, if you are looking for quick cash – making a lot of money speculating with bitcoin.

Because you can make good money for a few months even years, but when it drops, you might lose all that you gained previously, even more.

In the long run, you can recover (as is the case with dot.com bubble – the economy has recovered to better-than-before and it’s growing nicely again). But if you got out when the bubble burst, you realised your losses and never recovered them.

Risk #2 – scalability & transaction fees blocking widespread adoption

What’s not helping is also the growing cost of transactions – bitcoin transaction fees. It’s becoming very expensive to just send smaller amounts between standard users, because you could be paying around $5 to send $100. This destroys the micropayment idea of BTC. Depends on what wallet you use, how fast you want the transaction to be etc. Only in the last year the transaction fees skyrocketed – together with BTC price, raising number of transactions faster than number of miners. Projects like the Lighting network should help with that.

The bitcoin network has become much slower and much more expensive in the last year – and it’s still early days and not massively adopted. It needs serious re-work to be able to accommodate surge in transactions if it want’s to be used instead of cash everywhere. At today’s rate, it’s unusable for micropayments (I pay you a few dollars in BTC via our phones). But the potential is there, it just needs some development. Same as Internet in the 90’s – not many knew what to do with it, but look at it today.

Blockchain is like the internet, Bitcoin is like Google – technology built on this system. But Bitcoin could also be like AOL if it doesn’t adapt fast enough – forgotten in 15 years.

Risk #3 – competition, regulation

Bitcoin being the first, the one that started the revolution could be a good thing – it’s maybe positioned itself in a way that no one will be able to take it’s throne. Like Facebook in social networks field. But it could also mean that it will be replaced by many other – better technologies if it doesn’t adapt fast enough (or squabble about progress – like the SegWit2x discussion and inability to agree on a solution that works for all). Like AOL in internet services field or Yahoo in internet search field.

  • There’s a lot of development and competition going on – Ethereum, Bitcoin Cash and many other new cryptocurrencies.
  • Big companies creating their own blockchain solutions – what if VISA comes up with as fast, but cheaper solution or cryptocurrency?
  • Governments trying to regulate Bitcoin – they are losing a lot of money, so expect to see either a push to prevent the use of Bitcoin or attempt to regulate it (taxes, rules).
  • New ICO’s with awesome new technology – what if theirs is going to be so successful that it’ll replace Bitcoin?

How to mitigate risk and invest in Bitcoin?

  • Don’t invest only in Bitcoin – don’t put all your eggs in one basket, simple investing rule. Invest in blockchain, not only Bitcoin. Because Bitcoin has started it all, it’s stood the test of time (since 2009), but it’s not impartial to swings or bubble bursts. Just have a look at recent SegWit2x progress and BTC behaviour – simple news like that meant a 28% drop in a few days. It’s almost recovered since, but it’s still very volatile. That’s the math of loss recovery:
  • With larger losses the return necessary to recover to recover and get back to the same level (get the lost amount back) increases. If you lose 10% you need to gain 11% to recover. Lose 25% and it takes a 33% gain to get back to break-even. Bigger, say 50% loss requires a 100% gain to get your money back and an 80% loss can only be recovered by a 500% in gains to get your investment back.
      • With bitcoin, we have already seen a 28% drop ($7800 to $5600 in a few days) – and it wasn’t because some major security flaw or big news, only a disagreement between its creators and miners. A 50% drop is therefore not unlikely if some bigger news, scandal, security flaw – or a better technology props up.
  • Invest therefore in a variety of technologies on blockchain – same as with the dot.com bubble – if you invested only in one big company, you were risking a lot. But if you invested in various, you were likely much more protected – some of them failed, some of them didn’t and maybe one of them made you millions.
      • Apply the same with blockchain technology – but – research and buy a selection of good technologies using blockchain – some will fail, some will keep value, some will grow and maybe one will explode and do the same as Bitcoin last year. Which ones you should buy? Become a patron and you’ll find out – I’ll be writing more about which ones I own or how to pick the good ones.

Your options are for example:

      • Other cryptocurrencies that are getting enough attention and have good base / solid team behind them
      • ICOs that have good business plan and can execute it
      • Stocks that can benefit – are either implementing or focusing on blockchain or are providing infrastructure for it (computing power, storage etc)
  • Always remind yourself – it’s not cryptocurrency / Bitcoin that has the most staying power, but the technology behind it – blockchain. Even banks and major investment firms are looking into incorporating blockchain technology into their systems. They are not looking into using Bitcoin, that’s more of their enemy (which is a good thing for Bitcoin).
  • If you buy Bitcoin – use dollar cost averaging – don’t buy 1 big lump sum at once, especially at these high prices – spread it out into regular buys each month.
  • Stay informedBecome a patron, read other blogs and news channels about cryptocurrencies – if there is info that might save you a lot of money, you better try to find it as soon as possible.

 

There – you’ve been warned! Investing in Bitcoin may look very lucrative, especially with 1000% growth in one year, but it comes with many risks and challenges. Only invest what you are prepared to lose, invest .

 

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